Article was reposted with permission from ECG Management.
Ambulatory surgery centers (ASCs) have consistently been a source of strong merger and acquisition (M&A) deal activity over the last decade. As ASC management companies, health systems, and private equity (PE) firms implement robust ASC expansion strategies, demand for ASC acquisitions is growing, and this interest has translated to strong transaction multiples being paid for premium assets.
That can put sellers in an advantageous position. But getting the best price for your ASC requires extensive preparation, and a significant focus on optimizing your business, in order to package your ASC as a premium asset. Below are three steps to maximize your ASC’s valuation and facilitate a smooth transaction.
1. Optimize Your Managed Care Plan
A carefully crafted managed care strategy can have a profound impact on the performance of an ASC. To effectively maximize the value of your ASC, ensure:
- The local market reimbursement landscape is understood and factored into payer negotiations. Variances by market, payer, and service line are expected, and it’s important to know where your opportunity lies.
- Contracts are professionally assessed and negotiated. Engage in payer negotiations to address foundational items such as multiyear standard cost-of-living increases and adequate reimbursement for implants, and pursue carve-outs for procedures that are high cost and or have inadequate rates in your contracts. In-network centers will have access to more volume, which will generally drive more revenue into the ASC and will reduce risk for buyers. Assess affiliate and assignment language to ensure favorable terms are present when the facility is acquired and reimbursement is not put at risk.
- An updated, adequate fee schedule is present and correctly loaded into the billing system to enable maximum revenue capture and to avoid underpayments that are below contract allowed amounts.
- During negotiations, a business case for payer savings is developed. Discussions with payers can often extend beyond desired time frames. As an ASC operator or investor, be sure to bring a sound business case to payers at least six months prior to the contract termination date. Highlight important metrics such as cost comparisons between ASC and hospital-based services, volume of additional cases available to migrate to an ASC, quality outcomes, and high levels of patient satisfaction. Any payer and revenue concentration should be evaluated.
Optimizing your ASC’s managed care plan will drive top-line revenue, EBITDA margin, and an increased enterprise value.
2. Improve Financial Performance with an Efficient Business Office
Maximizing ASC operations drives financial performance. This involves two central functions:
Business Office Financial Responsibility
Setting, tracking, and driving accountability through tactical day-to-day financial goals is essential to realizing the value of the managed care plan. The business office should conduct audits to ensure the ASC is being paid in accordance with the allowed amounts for commercial payer contracts and government payers and determine whether any claims are being paid at 100% of charges. When a claim is paid at 100% of charges, it’s an indication that the ASC’s charge master is not adequate to capture the revenue due from the payer. This presents an immediate opportunity to increase cash flow and improve revenue and EBITDA.
It is also critical that the business office has complete fee schedules and payment logic from the payer and that the contracts are loaded into the billing system. This way, allowed amounts can be verified against payments and addressed with the payers if payments are below those amounts. Often payers do not load contracts correctly or update their fee schedules in their claims processing systems to reflect contract terms with annual escalators.
Finally, establish goals and targets for key operating statistics that will maximize overall value for the center. Standard business office metrics to monitor include but are not limited to:
- Days in accounts receivable (A/R).
- A/R over 90 days.
- Bad debt outstanding and write-off percentages.
- Denial rate.
- Days to drop a claim to measure the length of time it takes to bill payers.
Additionally, coding quality audits can be performed to improve revenue capture, coding compliance, and coding education.
ASC Operating Efficiency
In addition to billing and collections, financial performance is highly impacted by operational efficiencies. Maximizing operating performance can include:
- Measuring OR scheduling performance to ensure cases are not turned down and the appropriate time is allotted for a case; assessing OR turnover time to identify opportunities to enhance efficiency; and reviewing the effectiveness of process improvement programs.
- Evaluating staffing levels and regularly reviewing policy compliance.
- Monitoring first case on-time starts (FCOTS) to identify opportunities to reduce delays in the start of a case, and assessing block time utilization and policies to enhance optimization of OR utilization.
- Reviewing patient and physician satisfaction scores to determine opportunities for improvement.
Optimizing financial performance also includes tracking operational costs (e.g., salaries and benefits, drugs, medical supplies and implants) and utilizing preference cards to understand your direct costs. Engaging with physician stakeholders will help identify opportunities for improvement and enable effective implementation of plans that will drive efficiency, cost reduction, and overall financial performance. Showing your partners the economic impact of these savings, which can result in additional EBITDA and consequently a higher price for your ASC, can be effective in changing behavior.
3. Understand Key Transaction Considerations
Sellers should evaluate three key components when preparing for an ASC transaction:
- Buyer pool. It is important to consider the goal and post-transaction strategy of the ASC when assessing a buyer. Understanding the ultimate value of the selected equity partner is critical to a positive long-term relationship. Is your partner in this for the long term or a quick flip—and why should you care?
- ASC operations and expense allocations. When preparing for a transaction, it is important to decouple direct ASC expenses from shared staff or overhead allocations. During the FMV assessment, clear delineation of expenses and overhead will be critical to forecasting future operating performance.
- Long-term quality of earnings (QofE). QofE refers to the long-term sustainability of reported earnings in the historical financial statements. Optimized managed care contracts and an efficient business office will display the strength of negotiated contracts and revenue capture that drives top-line P&L performance. Stable, efficient performance over at least 12 to 24 months is optimal.
Committed, unallocated capital (“dry powder”) by PE firms is approaching record levels of $2 trillion. Coupled with aggressive M&A strategies by ASC management companies and health systems, the ASC transaction market is expected to be robust. Improving ASC valuation through managed care and revenue optimization strategies is a proven way to drive healthy operating and financial performance.
Article was written by Naya Kehayes, Jared Langus, Amy Coletti, Chaz Bates and Bryce Miller.